Search

UK PROPERTY- A PERFECT HEDGE AGAINST INFLATION

The recent volatility witnessed in equity markets has been attributed to greater than expected inflation. This upswing in inflation is not necessarily a surprise - with the global economy steadily reopening following a self-imposed COVID hiatus, a shift upwards through the economic gears was always expected to be the catalyst for a rise in inflation.


However, the recently reported doubling of UK inflation in April, coupled with America reporting the swiftest rise in inflation since 2008, spooked financial markets and saw analysts and commentators suddenly start to take the threat of inflation seriously.


As always, when faced with financial market volatility, the Federal Reserve and other Central Banks across the globe swiftly moved to reassure investors and stated that excessive inflation and interest rate rises were unlikely.


While they did concede that inflation will likely rise this year as the global economy gets back to business as usual, they stated their belief that this would only be a temporary rise.

Unfortunately, history tells us that inflation can be a cruel mistress, and just because policy makers say it will be controlled, does not necessarily make it so.

For some, this recent inflationary scare is a sign of what is awaiting the global recovery in the years ahead: a period of heightened inflation brought on by over a decade of suppressed interest rates and money printing.


While it appeared that the US had managed to avoid the inflationary trap, which had caught out so many sovereign States that had followed these fiscal policies in the past (Zimbabwe, Argentina, and the Weimar Republic, to name a few), the doubling down of these policies during the COVID-19 pandemic may have been a step too far. Subsequently, if sub-inflation comes for the American economy, it will become a global contagion that few economies will be able to avoid.


If this analysis is correct, and we are due to enter a period of inflationary pressure in the coming years, it is broadly accepted that the best way to protect your wealth from this threat is through the ownership of physical assets. One such asset is property.



As a physical asset, property can be expected to grow in line with inflation. Along with inflation linked growth, property also provides an inflation-linked yield, through rental income. Further, due to the historic stability of the asset class, banks and building societies are perfectly willing to borrow against the asset itself- a benefit that can significantly increase one’s return on investment.


Set these benefits against the negative real return you receive from cash, and it is no surprise that property prices continued to rise in 2020 in some cities and countries, despite lockdowns and a global pandemic.


One property market that saw strong growth was the UK - despite being subjected to one of the strictest global lockdown policies in 2020, UK property rose by an average of 10.2%,


In fact, the knock-on effects of locking the nation down for a year has unexpectedly been an increase in household savings along with an increased demand for properties.

This situation - coupled with a fundamental undersupply of property (less

than 9% of England is currently built on) and inflationary undercurrents - seems set to support UK property growth in the coming months and years.


While there have been numerous issues weighing down global sentiment towards UK property since the Brexit vote in 2016, it now appears to be well placed to benefit from a post-Covid future.


Keep an eye of the UK property market over the course of the Summer - it could yet again confound the sceptics.



As always, if you would like to discuss any of the issues raised in this article, or property more broadly, please do not hesitate to get in touch with us directly at:


ben@tailormyproperty.com



References

https://www.straitstimes.com/business/companies-markets/asia-stocks-spooked-by-us-inflation-alarm [straitstimes.com]

https://www.bbc.com/news/business-57165266 [bbc.com]

https://www.theguardian.com/business/2021/may/19/uk-house-prices-grew-in-march-at-fastest-pace-since-august-2007 [theguardian.com].